Gold ETFs Ride Thursday’s Portugal Bank Woes Higher

By Brendan Conway

It’s one of those days when inverse investments and those with a “haven” reputation are in demand. Gold is the key example, where the price of the most popular exchange-traded fund has broken to fresh four-month highs.

Gold futures are ahead by 1.3% this morning and SPDR Gold Trust (GLD) is climbing 0.9% in early trading following news that Portuguese regulators halted trading in shares of lender Banco Espirito Santo after a delay in the parent company’s short-term debt payments.

It’s “Groundhog Day” for those who remember 2011′s European debt crisis. RBC Capital precious metals strategist George Gero tells clients by email that fears about Europe’s economic recovery are stirring some of this morning’s gold demand — fears which are stoked by the Espirito news as well as weak euro-zone data this morning.

Should you be worried? BTIG technician Katie Stockton doesn’t sound very worried:

Reuters

We think the pullback is corrective, as opposed to the start of a bearish reversal. Short-term oversold conditions are widespread in Europe, and Portugal’s PSI20 is poised to register a DeMark “buy” signal tomorrow, suggesting the downmove is maturing. The SPX has initial support around 1925, although we will be watching the stochastics (not a specific level) to signal a buying opportunity.

The strategists at Rareview Macro sound more cautious:

In Europe, the Italian Industrial Production data showed the largest monthly output drop since November 2012. European peripheral spreads are now back at levels seen before the June ECB meeting, led by weakness in Portugal. To highlight the degree of retracement seen in the market, the Portugal-German bond spread is now at its widest level since March. While debt situation at Espirito Santo International continues to be a focus, the current perception is that its problems are an isolated incident. For those looking for a barometer to judge whether this idiosyncratic event will bleed into other assets, we are watching the iTraxx Financial Senior vs Main credit default swap indices. It is now at its widest differential in over five weeks, which does not bode well.

The state of the ETF market means there are much sharper knives to throw than the standard gold ETF. There’s a three-times leveraged bet on gold-mining stocks, for instance. Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG) ETF was the sixth-biggest gainer across all pre-market trading this morning, and is rising by more than 8%, according to FactSet Research Systems. Direction Daily Gold Miners Bull 3X Shares (NUGT), the double-leveraged version, is ahead by more than 6%. Market Vectors Gold Miners ETF (GDX), which doesn’t use leverage, is ahead by 1.6%.

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JULY 10, 2014 9:59 A.M.

H. Craig Bradley wrote:

GOLD'S "HAVEN" FUNCTION TIME-LIMITED

Gold is not a haven in reality. If a bear market reversal were to actually begin, it would pull everything everywhere down globally, if not immediately, then soon thereafter. So, the financial markets are all supported by the same Central Bank stimulus. Sure has not helped the peripherals in Europe much. The problems persist and European Central Bank Chief Mario Dragi's " Whatever it takes" ( Bazooka) may not be near enough to handle the situation if confidence unravels.

Lack of confidence or "panic" is good for gold initially. As we saw in 2008-2011, its "safe haven" features appear " time limited", meaning you can not just buy gold and hold it indefinitely. Its relative value "decomposes" as liquidity dries-up and gold has to be sold to raise much needed cash in a pinch.

JULY 10, 2014 10:09 A.M.

some random guy wrote:

if you bought gold as a safe haven in 1971 (when Nixon closed the gold window) at 35 bucks an ounce, at 1300 it's worth 37 x it's original value. I suspect that compares favorably with any other investment vehicle out there. So while any points about 'panic' buying are well taken, the underlying fundamentals that support Gold's ascent: the inability of fiat currency to survive, and the tendency of democratic governments to continuously increase entitlements are not going away.

JULY 10, 2014 11:10 A.M.

The Analyst wrote:

Update: While I have been high on gold shares during the past months, I noticed some cautionary flags which, if fully developed, could be cause of concerns.

While I still think gold shares are good investment, my recommendation is to proceed cautiously. In the mean time, I will further investigate these flags to see if they are real or bogus. After such investigation and analysis, the results will be posted. This is just an update.

JULY 10, 2014 12:08 P.M.

dave wrote:

The analyst is actually making some pretty darn good calls. We took a long position in nugt at 28 a couple of months ago, and this morning after a solid run up, we switched to dust which is at a low of 14.6. This is the low point of the past year. We had an upside price target of 1342, and cycles are still up, but we should have at least one more large drop before we have a real solid, sustained rally for gold. After another large drop, we should have a sustained rally, but we could get down to 1120 later this summer, or in the fall.

JULY 11, 2014 1:36 P.M.

The Analyst wrote:

Since Dec 2013, I have been recommending accumulation of gold shares. Those that acted on my recommendation have made some serious cash.

Now I am advising putting a hold on further accumulation of gold shares until the situation clarifies itself. Possibility exists that there are much better opportunities to accumulate gold share later on at an much lower entry price. You may rightfully asked, why?
If you are interested to know, read on. Otherwise. Stop reading.

Connecting the dots: Several key actions that impact on gold shares happened last week. While each of them looks innocuous individually, collectively, it looks ominous to gold shares and could cause a tectonic shift in the gold share landscape. Let me explain. First, based on the published Fed minutes, the Fed appears to have finalized their game plan for tightening the money supply and poised to execute. Second, a couple of days ago, Chinese government announced that they would stop currency intervention if "condition permits". Third, top level US and China leaders recently conducted a "meaningful meeting" (translation: decision meeting) on coordinating economic policy.

Bottom Line: One can speculate that the No. 1 and the No. 2 largest economy of the world made a bilateral agreement not to conduct competitive devaluation to export unemployment any more (kind of like - if you do not do it, I won't do it either) and to coordinate the management of inflation expectations (BTW... rise in gold price is one of those inflation expectations). Any rise in gold prices will have to fight TWO FEDS (the US Fed and the China Fed). As the Wall Street adage goes: Do not fight the Fed.... well... double "no" for fighting TWO FEDS.

The coordinated tightening of money supplies and their coordinated activities in managing inflation expectations in US and China will produce an almost insurmountable barrier for further advances in gold prices.

Sooooo hold off accumulation of gold shares for now and wait for a much better entry price later on. Gold shares have risen too far and too fast, and is ripe for a significant correction!!!

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.